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ON THE MONEY: Many Americans are clueless about life insurance

Feb 17 2013 1:25 am Feb 17 2:02 pm

The Life Insurance Marketing Research Association is an industry research organization, and its members include virtually every life insurance company of any size, not just in the United States, but around the world. LIMRA gathers information from all of its member companies and from consumers, and the resulting studies that they produce are first class.

Last year LIMRA made available a life insurance IQ test to 4,000 Americans to gauge their knowledge and understanding of life insurance. Less than a third (1,200) passed the 10-question exam, and the majority (55 percent) answered fewer than five questions correctly.

“In addition to identifying the aspects of life insurance that consumers understand and where consumers admit to being in the dark, the study also shed light on some widespread misperceptions,” said Jennifer Douglas, LIMRA associate research director for strategic and developmental research. “With life insurance ownership at an all-time low, it is important that the industry not only overcome consumers’ lack of knowledge about life insurance but address the misinformation that is out there confusing them and possibly having a negative impact on their image of the industry.”

Recently, LIMRA published some troubling statistics: one-third of all the adults in the U.S. have no life insurance at all. Worse still, two-thirds of all American males age 18 to 24 have zero life insurance. The distaff side is not any better, since one out of three women also have no life insurance. When you consider the fact that most insured adults in the U.S. have only minimal amounts of group term life insurance at work, it is clear that Americans are woefully underinsured.

Consumers believe life insurance costs nearly three times the actual price, which may be deterring them from getting the coverage they say they need, according to a new report released last year by the nonprofit LIFE Foundation and LIMRA. Survey respondents were asked to estimate the annual cost of a 20-year, $250,000, level-term life policy for a healthy 30-year old consumer. The actual cost is roughly $150, but Americans estimate the cost at $400. Younger adults, who are most likely to qualify for preferred pricing, overestimate the cost by nearly seven times the actual cost.

According to the 2012 Insurance Barometer Study, nearly a third of all consumers believe they need more life insurance, including 20 percent of current policyholders and about half of those who do not have any coverage. Yet one of the top reasons consumers cite for not obtaining more is that the product is “too expensive” (83 percent), second only to those who say they haven’t purchased more because they have “other financial priorities” (85 percent).

When one considers that 73 percent of us have no life insurance agent, and an equal number have no financial adviser, the picture becomes clearer – most adults in the U.S. simply don’t know who to call to get helpful and trustworthy advice about life insurance. Without a trusted adviser, it is difficult to know how much life insurance coverage to purchase, and when you throw in the myriad of different life insurance products that are available, the water gets even muddier. But it need not be all that complicated.

If you are under 45 and have a family, a simple rule of thumb is that you need a life insurance death benefit of at least 12 times your annual income. So, if your annual income is $50,000, and you are 45 or younger, you should have at least $600,000 of life insurance death protection from all sources. Assuming you had $50,000 of group term coverage at work, you have an immediate need for $550,000 of coverage. If you are a 38-year-old male in good (but not great) health, your annual premium for 30 year term would be around $690 per year, or about $57 per month – what a bargain. This death benefit would be paid to your beneficiary income tax free and then could be subsequently invested to provide income to your family.

With a 30-year term policy, you would have coverage until the age of 68 at this same premium each year. Most term policies have what is known as a conversion option, which means that you may change the policy type from term to permanent during all or a portion of the term period.

When it comes to finding an individual to assist you in your purchase decision, remember that life insurance is available now through your banker, your stock broker, your property and casualty agent, or through a life insurance agent. If you feel so inclined, you could purchase term insurance online, but most individuals would prefer to purchase through a knowledgeable person face to face. So, whomever you choose, make certain that the person you select is knowledgeable and trustworthy and that he or she won’t try to sell you what you don’t want or don’t need.

Got a financial planning question for Greg? You may email him at greg@lifesolutionsonline.net.

Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience.

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